What Is Bitcoin & How Does It Work?

Bitcoin, also known as “BTC,” is the most volume-popular cryptocurrency due to its longevity and credibility. Bitcoin forms part of a blockchain as well as the network that is required to power the cryptocurrency. 

In short,  a blockchain is a distributed digital ledger that serves as a shared database that stores information in a network of computers. The data in a blockchain gets secured via encryption. Blockchain gets its name from the blocks of codes it contains that are linked or “chained” together in chronological order, with each block having a record of transactions.

On the Bitcoin blockchain, when a new transaction occurs, the data from the previous block is copied to a new block along with the new data, it is then encrypted, finally, the transaction gets authorised by validators, known as “miners”, that are part of the network. Once the transaction has been verified, a new block is created thus creating a Bitcoin. Every transaction that takes place on the blockchain is publicly available for anyone to view.

What Makes Bitcoin So Secure?

There are multiple factors that make Bitcoin secure, mainly, blockchain –  the technology behind Bitcoin. We are going to explain some of the main aspects that make Bitcoin so secure. 

Firstly, Bitcoin uses cryptography as a form of encryption. In short, cryptography is a technique used by Bitcoin to send secure messages between two or more parties. The sender encrypts/hides a message using a specific type of key and algorithm and then sends that encrypted message sends to the receiver, and the receiver decodes the message to generate the original message.

The second security aspect is that Bitcoin is public, which, on a surface level may not sound safer – so let us explain. While your personal identification is protected through anonymity, Bitcoin’s ledger transparency means that all transactions that take place are available to the public. This makes it nearly impossible for scammers to cheat the system. With this data being publically available and your personal information being excluded in transactions, Bitcoin proves to be a very secure form of transacting. 

Thirdly, Bitcoin is decentralised – meaning that the transactions that take place on the blockchain are not controlled by one single person or entity, cutting out the need for third parties such as banks or governments. This also makes it hard for hackers to intercept because they would need to hack every computer on the network which would be impossible. 

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How Safe Is Bitcoin From Hackers?

Bitcoin is very safe from hackers because of the technology behind the blockchain as well as the use of cryptographic techniques. For the Bitcoin blockchain to be hacked, the following would need to occur. 

Potential hackers/a group of hackers would need to take over the blockchain by controlling the majority of that blockchain’s computational power, known as “hashrate”. If said hackers own more than 50% of the hashrate, they could implement an altered blockchain in what is called a  “51% attack”. This would allow them to alter transactions that were not confirmed by the blockchain before they took over. The attackers would then be able to use the tokens involved in transactions that the network had not confirmed. They could essentially then transfer the coins to anonymous addresses, and the altered blockchain would act however they had programmed it to work. This, however, is a very unlikely situation and it would not be easy to pull such a large-scale hack off.

Will Bitcoin Be Considered a Security?

While there has been much debate regarding whether Bitcoin can be considered a security or not, it has been concluded that Bitcoin is not a security. 

The SEC (Securities and Exchange Commission) oversees organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds as a form of regulation. The SEC believes that cryptocurrencies (in this case Bitcoin), serve as replacements for fiat currencies which are not considered securities.  

Tips For Storing Bitcoin After Trading

There are a few different ways for you to securely store your Bitcoin once you have purchased or traded with it. Bitcoins are kept safe in a wallet, but it’s a digital one rather than a physical one as we do with cash or credit cards. Both hardware-based and web-based digital wallets are available for Bitcoin storage. The wallet can also be stored on a desktop computer, or mobile device, or by printing the private keys and access addresses on paper and storing them somewhere secure. Below we will discuss the different types of Bitcoin storage and how they work.  

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Multi-sig Wallets

Multi-sig wallets often referred to as multi-sig vaults or safes are a type of cryptocurrency wallet that needs two or more private keys to carry out specific operations. The idea of a multi-signature wallet has become quite popular. It involves the approval of a few people (around 3 to 5) for a transaction to take place. The reason multi-sig wallets are growing in popularity is that the threat of theft as a single controller or server is limited and the transactions cannot be carried out.  The people who are allowed to transact are decided beforehand and when one of them wants to spend or send bitcoins, they require the other people in the group to approve the transaction.

Hot Wallets

Online wallets are also known as “hot wallets”. Hot wallets are digital wallets that run on internet-connected devices such as computers, smartphones, or tablets. Although hot wallets can be very convenient in the sense that you are able to access and make transactions with your assets quickly, they also pose a security risk. This risk comes in the form of private keys – the secure numerical code used in cryptography when transacting with Bitcoin. Hot wallets work best to store small amounts of crypto. 

Cold Wallets

The next type of wallet is considered the safest type of wallet for Bitcoin storage and is referred to as a “cold wallet”, sometimes also known as an offline wallet or a hardware wallet.  In short, a cold wallet is a wallet that is not connected to the internet, which means it is automatically at a far smaller risk of being compromised than a hot wallet. Cold wallets store the user’s address and private key in a way that is not connected to the internet and typically come with software that works in conjunction so that the user can view their portfolio without putting their private key at risk. 

Potentially the most secure type of cold wallet is referred to as a “paper wallet”. A paper wallet is a cold wallet that can be generated off of certain websites where it produces both public and private keys that the user prints out on paper for storage. The ability to access cryptocurrency in these addresses is only possible if you have said piece of paper which the user usually stores in a safe or bank. 

A hardware wallet is commonly a USB drive that stores the user’s private keys securely. This form of storage has major advantages over hot wallets because it is unaffected by viruses that could be on one’s computer.  This means that your private keys never come in contact with your network-connected device or potentially vulnerable software. These devices are also typically open-source, allowing the community to determine their safety rather than a company declaring the safety. 

FAQs about Bitcoin Security

What Makes Bitcoin Secure?

Bitcoin’s security is linked to the blockchain that it is built on. Bitcoin uses cryptography to encrypt and secure messages exchanged between participants. This ensures secure communication and protects the integrity of transactions. Bitcoin’s public nature also enhances its security. While personal identification remains anonymous, all transactions are transparently recorded on the blockchain which makes it extremely difficult for scammers to manipulate the system.

What Makes Bitcoin Safe from Hacking?

The decentralised nature of Bitcoin keeps it safe from hacking. This is because hackers would need to control more than 50% of the network to hack into Bitcoin and its blockchain. This hypothetical “51% attack”, and almost impossible task, would enable a hacker to manipulate unconfirmed transactions and transfer coins to anonymous addresses according to their programmed preferences.

Is Bitcoin a Security Asset?

While there is wide debate on whether cryptocurrencies are securities, the United States Securities and Exchange Commission does not define Bitcoin as a security.

What is the Most Secure Way to Store Bitcoin?

There are several ways to store Bitcoin securely. To get the most secure storage, having a cold wallet which is not online minimized the risk of compromise and attack. Having a limited amount of Bitcoin in a hot wallet (online) means you can transact easily but you will lose some of the security and risk online attacks.

What are Other Ways to Store Bitcoin?

You can store Bitcoin online in hot wallet, such as on an exchange. A cold wallet, such as through Ledger, keeps your Bitcoin offline. Other methods to store Bitcoin include paper wallets (which is a piece of paper with your Bitcoin wallet details) or a multi-signature wallet, which requires two or more methods of signing in.